The third meeting of the Interim Joint Committee on Transportation was held on<Day> Tuesday, August 5, 2003, at 5:00 PM (CST), at the Center on the Main in Leitchfield, Kentucky. Senator Virgil Moore, Chair, called the meeting to order, and the secretary called the roll.
Present were:
Members: Senator Virgil Moore, Chair; Senators Paul Herron Jr, Robert Leeper, Richard Sanders, Jr., Gary Tapp, and Johnny Ray Turner; Representatives Eddie Ballard, Paul Marcotte, Russ Mobley, Marie Rader, Ancel Smith, Jim Stewart, Tommy Turner, and Mike Weaver. Representatives C. B. Embry, Jr. and Tommy Thompson attended the meeting as legislative guests.
Guests Appearing Before the Committee: J. M. Yowell, State Highway Engineer, Debra Gabbard, Office of Policy and Budget, Taylor Manley, Department of Fiscal Management, Elizabeth Baker, Assistant General Counsel, Kentucky Transportation Cabinet. Dean Blake, Plantmix Asphalt Industry of KY., Inc.; Jack Fish, Kentuckians for Better Transportation; Charles Lovorn, Kentucky Association of Highway Contractors; Paris Hopkins, Governor’s Office, and Barry Cannon, Grayson County Chamber of Commerce.
LRC Staff: Kathy Jones, John Snyder, Geri Grigsby, Bart Hardin, Jay Hartz, Joe Lancaster, Bryan Sunderland, and Linda Hughes.
Prior to the 5:00 p.m. (CST) meeting at the Center on the Main, the members were taken on a two-hour tour of local businesses, hosted by the Grayson County Chamber of Commerce. The tour encompassed the future Leitchfield Bypass, TrimMasters, Inc., and Q.P.I., Inc. TrimMasters is a manufacturer that makes car seats for Toyota and Q.P.I. is an internet-based business selling various types of board games, under the email address of “Dozens of Games”.
Chairman Moore opened the meeting by welcoming the legislative members and guests. Elizabeth Baker, former Assistant General Counsel, Kentucky Transportation Cabinet, informed the members that she had recently accepted a position with the Justice Cabinet. She thanked the members for their support in the past and said she looked forward to working with them in the future.
The first item on the Committee’s agenda was a presentation on the “spend down plan” for highway projects subject to delay or termination due to dwindling road funds. Taylor Manley, Department of Fiscal Management and Debra Gabbard, Office of Policy and Budget, made this presentation.
Mr. Manley said that at the end of fiscal year 2003, the Transportation Cabinet’s Road Fund balance was approximately $357.5 million, and of that amount, $333.9 million was unspent FY 2003 appropriations but obligated for various projects. He said that that remaining $23.6 million was made up in part from Road Fund receipts of $4.8 million and $18.8 million in FY 2003 unspent and uncommitted appropriations.
According to Mr. Manley, the state construction account’s fiscal year 2003 expenditure balance was $325.4 million, compared to $157.2 million for fiscal year 2000. The unspent fiscal year balance was $103.8 million. Projecting into fiscal year 2004, Mr. Manley noted that the expenditure balance would be around $237.4 million. He said that that figure represented a new appropriation of $110.0 million for FY 2004, plus the $103.8 million balance from the state construction account and the $23.6 million from the Road Fund balance. Mr. Manley cautioned the members that the state construction account would be a minus $99.3 million if the Cabinet preceded with the $336.7 million in contracts that had been issued as of June 30, 2003.
Mr. Manley noted that the state’s Road Fund projected cash balances were $357.5 million as of June 2003, $237.2M in September, $124.7M for December, $212.4M in March 2004, and $166.7 million in June 2004. Federal TEA-21 money that has yet to be reimbursed to the state represents $54.0M, $27.2M, $44.3M, $60.5M, and $50.4M, respectively. When asked, Mr. Manley stated that there was a $259 million balance as of this date, with $65 million in outstanding reimbursements due from the TEA-21 money.
Senator Sanders asked what projects had been removed from the July letting. Mr. Manley said that only Six-Year highway Plan projects from the July letting have presently been removed. Senator Sanders then asked when those projects would be re-bid. Mr. Manley said no re-bid process was needed since the projects had yet to be placed out for bids. He said his best guess was that the projects might be in the August letting; however, the Cabinet needed to confer with the Finance Cabinet on the final timetable.
Representative Marcotte noted that he had attended a recent American Legislative Exchange Council (ALEC) in Washington D. C. meeting and learned that TEA-21 funds would expire October 1st and asked what the repercussions were if the federal government has not reauthorized the appropriations by the first of October. Mr. Manley said that TEA-21 originated six years ago and that Representative Marcotte was correct when he said that this program would end as of October 1, 2003. Mr. Manley said that the TEA-21 program would shut down by the first of October for new and existing federal projects unless the program was reauthorized prior to that date.
Mr. Manley said that 18.7% of the state’s motor fuel tax receipts go to the counties. Under the provisions of the cooperative county agreements, the Cabinet traditionally, at the beginning of each fiscal year, sends to each county about 80% share of its motor fuel tax receipts. This money, which amounts to around $35-$40 million, is paid in advance prior to its collection. Mr. Manley stated that it is likely in 2005 the Cabinet will modify the cooperative agreements, beginning to reimburse the counties as the state actually collects the funds. At this time he did not know how the money would be sent, i.e., monthly, quarterly or every six months. Committee members questioned whether the Cabinet could statutorily change the manner in which the counties were paid their County Road Aid.
Senator Tapp questioned if the $35-$40 million was a yearly appropriation. Mr. Manley said that was a yearly reimbursement.
Representative Mobley asked what fund the $12 million bridge settlement was credited to. Mr. Manley said the state construction account.
Representative Mobley commented that he had asked the Cabinet, at the Committee’s last meeting, how much state money was paid out each year in construction bonuses and that he had yet to obtain that figure. Mr. Yowell, State Highway Engineer said highway bonuses were used in high traffic density areas to speed up road construction, high density areas traveled by 100,000 or more vehicles a day. He noted that the Shawnee Expressway in Jefferson County was the only project currently offering an-ahead-of-schedule bonus.
Mr. Manley said the Cabinet has developed a new procedure to control the start of new Six-Year Highway Plan projects, which in essence controls the cash outlay. He said that a review group, consisting of the state highway engineer, deputy state highway engineers for both program planning and management and project development, and the commissioner of fiscal management, meet the first and third Mondays of each month, to review proposed project authorizations. The responsibility of this group is to look at each project authorization and determine the long-term cash impact of the projects are authorized. Mr. Manley said that in addition to the cash capacity, other weighing factors are the preservation of the existing roadway system, the safety of the traveling public, and the overall economic development impact. Based upon the recommendations of this group, the Transportation Cabinet Secretary decides which projects will move forward and which will be delayed.
Mr. Manley said that the Transportation Cabinet and the Finance Cabinet have discussed the possibility of two cash management techniques. The first is to internally borrow from other state agency funds and the second, is borrowing externally, such as through revenue anticipation notes, not through the issuance of new bonds. Mr. Manley stated that the Finance Cabinet strongly opposed the external borrowing, which would only be used in the event that the internal borrowing failed.
Mr. Manley went on to say that the suspension of work on a project would only be a last resort, but cautioned the Committee that it was within the realm of possibilities. He stated that the Cabinet had informed the Committee during its June, 3, 2003 meeting, that the state had begun inserting clauses in all of its highway contracts that specify that if the Road Fund money goes below a certain level, then the project(s) could be stopped or delayed. He said that the Cabinet would consider this as only a last alternative, and that the Transportation and Finance Cabinets jointly were currently monitoring the on-going cash management activities.
Mr. Manley said the Cabinet understands that the suspension of a project would be a severe move, affecting vendors who have employees and equipment on the job. He said in identifying candidates for suspension of work, the Cabinet would look at the safety issues involved, such as land restrictions and detours, uneven payments or barricades that pose a safety hazard to the travelling public; environmental concerns, such as soil erosions; and obviously the cash outlay. Mr. Manley said that if a project was suspended, the state would consider payment of the contractor’s stock piled materials as well as the cause of material deterioration, the demobilization of the vendor’s equipment as well as the start-up cost once the project resumed, and overall cost of leaving that project unattended. He said that in signing a suspension contract the contractor waives the right to claim damages that may result from the suspension; however, the Cabinet considers itself liable for the actual work performed prior to the suspension notice, as well as reasonable close out costs.
Senator Tapp asked if revenues had increased since the economy has started picking up. Debra Gabbard, Office of Policy and Budget, noted that 2001 revenues had declined, 2002 revenues had rebounded with a 5.2% growth (mostly due to automobile no interest sales) and the 2003 revenues were flat, with just a 0.4% growth. She said that the growth rate does not even sustain the inflationary cost increases the Cabinet is currently experiencing. Ms. Gabbard said it is projected that 2004 will yield a 1.4 % increase, but cautioned that that 1.4% figure may be lowered when the consensus forecasting group meets next week. She said that the decrease can be attributable, in part, due to the closing of the toll roads, however, the state’s revenues have basically been flat. Senator Tapp asked what the 1.4% represented in actual money. Ms. Gabbard said it is about $1.2 million.
The next item on the Committee’s agenda was a discussion of the state’s bonding capacity as a source of revenue to prohibit delays in highway projects. Ms. Gabbard told the Committee that the state’s future highway construction debt service was estimated at $160 million for fiscal year 2004, $119M for FY 2005, $125M in 2006, $115M in 2007, and by the year 2014 it is estimated to be approximately $25 million. This debt service does not include the new Transportation Cabinet building under construction in Frankfort. That debt service on the building is included in the Cabinet’s General Administration and Support funding and is $7.34M, $7.32M, $7.33M, $7.30M, and $7.27, respectively.
Chairman Moore asked about the state’s capacity for new debt. Ms. Gabbard said that the state currently employs a 6% rule of thumb, which means that the state’s total revenues divided by debt service does not exceed 6%. She noted that rating agencies are comfortable with that calculation. Ms. Gabbard said that total revenue is defined as all General Fund, Road Fund, Agency Fund revenues, as well as the Tobacco Settlement proceeds, and debt service is defined as both the principal and interest payments on the state’s debt. Ms. Gabbard said that if you were to deduct the Road Fund revenue, the state’s debt service is 15% of the annual revenues, which drops to 11% in fiscal year 2006.
Senator Sanders asked how project estimates are comparing to project bids. Mr. Yowell said that the one thing the Cabinet has learned in the cash spend down process is that there are two different words – estimate and budget. The project’s budget is the number in the Six-Year Highway Plan, the estimate is what the Cabinet estimates the cost of the project prior to its bid. For the past year, Mr. Yowell, said that most of the bids are running at or below the Cabinet’s estimates. Senator Sanders asked if, overall, the bids were coming in lower than the estimates. Mr. Yowell said that on an average year the Cabinet would reject about 10% of the bids because they are over the Cabinet’s estimates. He said those projects are re-bid a month or two later or revised by the Cabinet to lower the cost of the project.
Senator Sanders noted that approximately $35 million of Road Fund money is transferred yearly to the State Police. He commented that this transfer is something the Committee should be made aware of and questioned if Road Fund money was subsidizing the General Fund. Senator Sanders commented that he thought there were also some economic develop projects currently coming out of the Road Fund, and asked Ms. Gabbard if there were any funds that could revert back to the Road Fund. Ms. Gabbard said yes, she thought there could be some other money redirections and stated that she would be happy supply the Committee with a list of those. She mentioned the $2.5 million transfer of the Kentucky Pride Fund, as one example.
Chairman Moore commented that the Cabinet has painted a bleak picture. He said there are signs the economy is improving and hoped that it continues to do so, as predicted.
Representative Ballard commented that in light of all of the bad publicity the Transportation Cabinet was receiving he wanted everyone at the meeting to know that all of the employees that had come before this Committee, as well as the Appropriations and Revenue Committee’s Budget Review Subcommittee on Transportation, had, in his opinion, been honest and more than willing to provide any information requested of the two committees. Chairman Moore seconded Representative Ballard’s comments and thanked him for drawing the Committee’s attention to this issue.
Chairman Moore asked if anyone in the audience wished to make any comments. Jack Fish, Kentuckians for Better Transportation, said that he was concerned over the budget challenges facing the 2004 General Assembly; Charles Lovorn, Kentucky Association of Highway Contractors, commented that it was important that the state not suspend highway projects. He cautioned that a single delayed project could result in confusion and congestion on a Kentucky highway, as well as putting legislators’ constituents out of work. Dean Blake, Plantmix Asphalt Industry of KY., Inc., said that everyone needs to work together to try and find the answers. He said there are approximately 144 plants with over 5,000 people around the state that are looking at a bleak future without the state’s help. Paris Hopkins, Governor’s Office, said the Committee’s discussions this evening were serious and that he felt confident the Committee and Cabinet would give the situations serious deliberation.
Barry Cannon, Grayson County Chamber of Commerce, thanked the Committee for making use of their facility. He noted that the building was a former propane gas storage building, and that the renovation of the building was as a trilateral agreement between Leitchfield’s Chamber of Commerce, Industrial Development Foundation, and the Tourism Commission.
With no further business before the Committee Chairman Moore invited everyone to his ranch for a cookout and live entertainment. The meeting adjourned 6:20 p.m. (CST).